Economic Woes

by ALI CHENAR

[ analysis ] Iran's political evolution has not been without economic consequences. The increasingly uncertain future has affected businesses and households alike. Yet many important questions have remained unanswered, such as whether the leading economic institutions can be relied on. It seems now that some qualified answers are at hand.

On January 24, a Sunday, rumors spread in the Tehran and Isfahan bazaars that the two largest publicly owned banks in Iran -- Bank Melli and Bank Mellat -- would declare bankruptcy by the following Wednesday. Several blogs, which were linked to on Balatarin.com, a popular website, speculated that these reports were indeed true. Among those interviewed by VOA on the matter was Dr. Shahin Fatemi, who recommended that people withdraw their deposits from these banks. Text messages flew, advising the purchase of dollars, Euros or gold. Well informed Bazaaris and ordinary people alike rushed to the banks to pull out their money. Weblogs reported that in Tehran's Bazaar, anti-riot police had to clear Bank Mellat's offices. Reports followed that in Vozara Street, police broke the windows of the Bank Melli branch in order to push customers out, then chained the entrance and shut it down. The situation seemed desperate -- was this the dawn of a great depression?

It is hard to say.

Certainly the mood in Tehran and several other cities resembled that accompanying great runs on the banks in historical times of crisis. Still it is not prudent to think that the Iranian banking system is crashing. By any reasonable standard, the system crashed a long time ago. In a country where balance sheets are rarely the basis of decision making, a large loss is little different in practical terms from a small one. Iranian banks have continued to function despite their losses and the increasing liabilities imposed on them by the government. The significance of recent events lies not in the prophesied bankruptcies, but in the reaction of individuals to the prophecy.

The panic that produced the run on the banks signaled a significant shift in the mindset of Iranian consumers. The implication of what took place is amplified when we recall that the banks in question are publicly owned and run by the state. Reza, an Iranian blogger and
student, wrote, "You must understand with our level of volatility, public banks are among the few institutions we trust. We trust them that they would not fail us." He is not alone. Leveraging public revenues and resources, government sponsorship supposedly immunizes these institutions from economic fluctuations and other events. Many Iranians have long considered public banks as the most secure sites for their savings. It seems that belief is changing. Sara, another Iranian blogger, wrote, "Today more than one shopkeeper told me: 'These days the safest place for your money is right under your mattress.' And more than one family member called me to say to withdraw my deposit." In a country where the state is the ultimate owner and most reliable guarantor -- or so it is represented -- the recent events show that public trust in the government's guardianship of the economy might be dwindling.

It is hard to guess how much of this change of attitude is due to the political events that followed Iran's presidential election last summer. Some Iranian bloggers argue that it is due more to the planned liberalization policies that will have a major impact on subsidized products and services. Nima, a graduate student in economics, believes both are important. He thinks that the uncertainty associated with political affairs has contributed
to a growing sense of unpredictability and economic vulnerability. The government's insistence on liberalizing markets and dismantling the subsidization machine has added to consumers' anxiety and lack of confidence. Iranian consumers thus find themselves in a
precarious position, where no one knows what tomorrow will bring.

However, there are other perspectives on the situation.

In conversation with this correspondent, an Iranian economist, who wishes to remain anonymous, explained that cycles of heightened uncertainty are by no means rare in
the country. During the war with Iraq in the 1980s, events comparable to the recent bank run were commonplace. A rumor about a butter shortage or an unexpected increase in the price of tea was all it took to send Iranian consumers running to stores and supermarkets. He added that the most recent example of such behavior was the reaction to fuel rationing in 2008. In his opinion, what happened this January was just another
example of overreaction to rumors, which were given credibility by bloggers and news outlets such as VOA. He pointed out that Iran's economy is a volatile one and some consumers traditionally protect their interests by taking any and every rumor seriously.

He might be right. However, whether or not the timing of events accords with a cyclical explanation, the facts remain: respectable citizens, fearing that state banks were about to go bankrupt, broke into those banks to demand their deposits. Ironically, the true crisis is not one of banking failure, but one of consumer confidence, without which neither banking nor economic policy making is possible. Recent events have served notice to Iran's policy makers that they might be facing a different kind of customer now, a kind that might not be facilitating their policy making in the near future.

4 Comments

Is there anything to the rumor that many oil industry workers are leaving Iran for much higher pay in Arab countries. Rumors say that many have not been paid for many weeks and the rest are just moving in fear of not getting paid.

nassim sabba / February 14, 2010 6:36 AM

Economics is the gunpowder of all revolutions: runaway inflation, poverty, famine, strikes, regime bankruptcy, and even absurd conspicous consumption of the French court.

There was a famous front page Kayhan story, in 1978 of a Bank Melli internal Memo, showing monthly outbound bank-wires in the tens of millions $, with the accounts and names of the regimes ministers, generals, and officals.

This is considered one of the top 5 images of the revolution that sealed the regimes fate. Money has a polarizing force, and in Iranian society trade is more sacred than religion.

The recent posts elswhere here of Khamaeini's $18 billion being couriered out by truck, and confiscated in Turkey...is the first of this trickle, which will flood soon.

The Mullahs are billionaires, they live in the Shah's Palaces, with Dassault Falcon jets, their Ambassadors live in $20 Million Townhouses on Fifth Avenue, Kensington, Champs Elysee; and have household courts that rival Versailles; and their kids drive Lamborghinis and Ferraris.